Daejan Holdings is a £900m UK listed real estate investor that is majority controlled by the Freshwater family. The group invests in the UK and the US and has 52% of its asset base in residential property. A policy of low gearing has allowed Daejan to withstand downturns and outperform the UK real estate sector.

In the Industry Classification Benchmarks (ICB) the real estate sector is listed as part of the financial services industry. Banks and real estate groups have a lot in common with both being cyclical sectors that deploy high levels of debt.

In a downturn this can be a deadly combination with many banks failing in the financial crisis. Real estate firms also saw weakness with the UK's two largest groups – Land Securities and British Land – undertaking rights issues in 2009.

Land Securities rides the booms and busts

5555de47a823dD1.png

A recession reduces the valuation of real estate and sees lenders become more conservative on credit terms.  This can bankrupt some of the weaker real estate groups and makes it a difficult to invest in real estate groups.

Most of the large real estate groups firms are focused on mature, income producing assets. The higher risk real estate groups undertake non-income producing development projects which may deliver large payoffs.

We note that Land Securities and British Land don't have particularly impressive long-term share price performances.  This partly reflects the high dividend payout ratios but also suggests they have had too much leverage going into downturns.

Against this backdrop the real estate investor Daejan Holdings is notable for having a policy of low financial gearing.  In March 2014 Daejan had a gearing ratio – borrowings over total assets – of only 17.6%.

Kensington real estate owned by Daejan Holdings

5555de741cb93D2.png

Source: Daejan website

Low financial gearing is likely to remain in place as the family majority ownership means that capital preservation is paramount.  This prudent balance sheet has allowed Daejan to be more resilient than rivals during the financial crisis.

It is also notable that Daejan's annual dividend hasn't been cut in any year from 1993 to 2014 and increased from 27p to 82p over the period.  By contrast Land Securities slashed its annual payment by half during the financial crisis.

Daejan's low gearing has allowed it to outperform

5555de93046beD3.png

Source: Daejan 2014 annual report

Daejan's real estate

Daejan is also unusual for having…

Unlock the rest of this article with a 14 day trial

Already have an account?
Login here